Trade unions and Labour MPs reacted with anger on Wednesday after the government announced the closure of two in three of the remaining Remploy factories for disabled workers with the loss of more than 1,700 jobs.

The other factories face a highly uncertain future under plans to wind up the state agency and float off its profitable parts or sell them to commercial operators.

The announcement by Maria Miller, minister for disabled people, brought to a head a bitter and long-running battle over the Remploy factories, which were set up after the second world war to provide sheltered employment for disabled people.

Most disability charities back the move on grounds that the sheltered factory model is long outdated. But unions expressed outrage, pointing out that the decision came just days after the passage of the government's welfare reforms and represented a second crushing blow to disabled people.

Len McCluskey, general secretary of the Unite union, said: "This is a barbaric decision. The government has sunk to a new low by sacking over 1,000 disabled workers."

Phil Davies, national secretary of the GMB union, said: "It is a disgrace that a number of large charities, set up to help disabled people and run by very well-paid, able-bodied people, have misled the British public and provided the government with the cover to undertake this act of sacking disabled workers. Shame on them."

Many Remploy factories have already closed, but only a handful of the remaining 54 break even on their operations, which range from making toiletries to the supply of components to the motor industry.

The average subsidy for each job in the factories is £25,000 a year. With a five-year government funding package of £555m for Remploy running out at the end of this month, ministers commissioned a review of the whole issue of employment support for disabled people, led by Liz Sayce, chief executive of charity Disability Rights UK and an open critic of sheltered employment.

Miller said a public consultation on its recommendations had found an "overwhelming consensus" behind its central theme that the £320m spent annually by government on disability employment – which would be protected – should be concentrated on disabled people themselves. "That is why we have accepted the recommendation from the Sayce review to refocus support on individuals through services like Access to Work, rather than institutions like Remploy, so more disabled people can work in mainstream employment rather than government-funded segregated factories," Miller said.

Of the 54 factories, 36 described as "not viable" will lose their subsidy from 31 March. They employ a total of 1,752 people including 1,518 people with disabilities.

The other 18 factories, described as "potentially viable" and employing 910 people, including 706 with disabilities, will continue to share a reduced subsidy while they are being assessed for a future "outside government control". A spokesman said this would mean "employee-led or open-market exit".

The same assessment will be made of Remploy Employment Services, the separate operation which helps people into mainstream jobs. Last year, it assisted 20,000 people to find or keep jobs.

All disabled Remploy employees affected by the changes will be guaranteed a share of an £8m package of support over 18 months. "Around half" of this fund will be provided to them in the form of personal budgets averaging £2,500 each.

To sugar the pill further, Miller announced an extra £15m over three years for the Access to Work programme, which provides support such as interpreters, special technology and office adaptations for disabled people taking mainstream jobs. The programme has a current annual budget of £100m. The minister said the £15m, combined with "other efficiencies", would help a further 8,000 people into work or to retain an existing job.

Phil Friend, vice-chair of Disability Rights UK, said: "Organisations led by disabled people have campaigned long and hard for employment support on our own terms, so we can work in every type of job and every part of the economy. That is the right model for the future."

While the Remploy factory model was right for the 1940s, it was unsustainable today, Friend said.

In the Commons, however, the Labour shadow work and pensions secretary, Liam Byrne, branded the announcement a "callous decision". He said it was "disappointing" that it had been made in a written statement just after prime minister's questions.

Ann Clwyd, Labour MP for Cynon Valley, attacked the "extreme discourtesy" of the means of the announcement and declared: "It is an utter disgrace to do this to disabled people."

With seven Remploy factories in Wales among those earmarked for closure, affecting 272 workers, the Welsh government expressed profound disappointment and predicted the effects would be "devastating for those workers, their families and the local communities".

Union leaders warned the closure plans would "not go unanswered". Shop stewards from all the Remploy factories will meet later this month.